Market Dominance: The Inadequacy of Section 4 of the Competition Act, 2002

[Gokul Plaha is a 4th year B.A., LL.B. (Hons.) student at the National Law University, Delhi]

Introduction

Section 4 of the Competition Act, 2002 prohibits the abuse of a “dominant position” in the market but does not penalise “dominance” per se. This means that any firm or enterprise is well within its right to acquire a dominating position in the market, even by way of indulging in anti-competitive conduct, till the point it becomes “dominant”. The Competition Commission of India (CCI) in In Re: Mr. Mohit Manglani and Flipkart & Ors. held that since none of the concerned parties was “dominant”, it was not necessary to enquire into the allegations of “abuse of dominance” against them. In this backdrop, it is worthy to examine section 2 of the Sherman Act, one of the pillars of antitrust law in the United States (US), which apart from outright “monopolisation”, also penalises an “attempt to monopolise” markets. In United States v. Grinnell Corp., the US Supreme Court differentiated between “wilful acquisition or maintenance of [market] power” and “growth or development [of an enterprise] as a consequence of a superior product, business acumen, or historic accident.”

Nature of the Digital Economy and Associated Challenges

The rise of the FANG on the NASDAQ is indicative of the fact that the nature of the digital economy is such that market dynamics favour increased concentration and the emergence of structural barriers to entry for market competitors. With the rise of artificial intelligence and machine learning, the digital economy is expected to become even more reliant on data. Access to data can serve as a critical entry barrier with large incumbents like Amazon and Google possessing troves of consumer data at their disposal, utilising the same to prevent competitors from challenging them.[1]

There are several competition related problems associated with “big data”. Algorithms can indulge in direct or tacit collusion, which can be challenging to detect, as far as traditional competition regulation tools are concerned. Another feature of the digital economy is near perfect price discrimination on account of access to information about consumer patterns. The practice of “behavioural discrimination” can help in targeted advertising and pricing of products in order to guide or nudge the conduct of consumers. Further, large incumbents can also collaborate, for example by sharing data, and simultaneously compete for consumers, and in the process create entry barriers for their competitors in the market. The dynamic operating between platforms Google’s Play Store and Apple’s App Store and app developers illustrates the same, with the former almost magnetically attracting the latter. Recognising access to “big data” as a structural barrier to entry in the digital world, regulators in the EU are considering overhauling their merger rules.

Further, the digital economy offers disproportionate returns on network effects, and rewards economies of scale (especially in two-sided markets), which in turn have a tendency to transform into potentially very lucrative lock-in effects. Consider the case of Facebook; its value to potential new consumers is proportional to the expansion of its user base. Significant “switching costs” and “experience effects” can desist consumers from taking advantage of the “multi-homing effect” in the digital space, i.e., the option available to consumers to move on to other competitors in case of deficiency or dissatisfaction with service with just a click. For instance, users of e-commerce platforms highly value their ability to indulge in “one-stop” shopping at an online platform that they can trust.[2] In United States v. Bazaarvoice, Inc., the Justice Department of the US Government recognised “switching costs” and opined that “… as more retailers purchase Bazaarvoice’s PRR platform, the Bazaarvoice network becomes more valuable for manufacturers because it will allow them to syndicate content to a greater number of retail outlets. The feedback between the manufacturers and retailers creates a network effect that is a significant and durable competitive advantage for Bazaarvoice.” Further, the fact that digital companies operate on near-zero marginal production costs also raises many potential competition concerns.

In Fast Track Call Cab Pvt. Ltd, Meru Travel Solutions Pvt. Ltd. v. ANI Technologies Pvt. Ltd., the CCI rejected allegations of “abuse of dominance” in the city of Bengaluru against Ola and clarified its stance in terms of what the functionality of India’s competition law regime ought to be. The CCI leaned in favour of the “consumer welfare” philosophy and opined that such a regime fostered competition on the presumption that this would lead to advantageous outcomes for consumers by incentivising low production costs and increased consumer access. In other words, it was held that competition, in and of itself (minus these benefits), was not sought to be protected by the competition regime. By implication, it means that the regulator will not intervene in case harm accrues only to market competitors (and not consumers) by virtue of an enterprise engaging in anti-competitive conduct. Such an approach legitimises the predatory pricing practices being employed by certain taxi aggregators and telecom behemoths in the Indian digital economy. In In Re: Bharti Airtel Limited and Reliance Industries Limited & Reliance Jio Infocomm Limited, the CCI stressed that being a new entrant in the telecommunications in the market, Reliance Jio’s pricing strategies to build its own network effects and undercut its competitors, was not an anti-competitive practice since the relevant market consisted of other big incumbents.

Now, a whole body of research has shown that once in a position of dominance, companies operating in the digital space are prone to reducing their quality of service.[3] To worsen matters, in many instances, it might prove extremely challenging for consumers to detect this reduction in quality, thus limiting the scope for multi-homing effects to play themselves out. Further, market incumbents tend to divert resources from further innovation towards trying to keep potential competitors at bay, as the latter strategy can potentially be more profitable for them. Therefore, it is clear that the present position of law insofar as it allows regulatory intervention to follow only after an abuse of dominance in the relevant market occurs, is inconsistent with the regulatory approach espoused by the CCI in the Meru Travel Solutions case

Conclusion

An innovation driven approach to competition law necessitates focusing on the appropriate timing of regulatory intervention.[4] Getting the timing right is crucial in terms of ensuring that markets remain competitive and incumbents cannot rely on mere rent seeking in order to remain profitable. The prevailing legal threshold, whereby only “abuse of dominance” is penalised, seems to be an anachronism in the face of the peculiar dynamics of the digital economy. Although innovation remains the fundamental answer to competition concerns in the longer term, a robust competition regime must focus on making prevalent market conditions conducive to competition. Experience tells us that antitrust action against Microsoft by the US authorities opened up space for companies like Google and Facebook to become what they are today. Therefore, the approach of the competition law regime must be to go after anti-competitive conduct, regardless of whether the enterprise in question is dominant or not. After all, today’s incumbents are yesteryears’ upstarts!

It is therefore recommended that the Indian competition law regime must move from a threshold of “abuse of dominance” to “abuse to dominate” as far as penalising anti-competitive conduct is concerned.

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2 comments

“This means that any firm or enterprise is well within its right to acquire a dominating position in the market, even by way of indulging in anti-competitive conduct, till the point it becomes “dominant”.”

This sentence is inherently contradictory.

Dominance is the ability to act independent of market forces. A market is self-correcting by nature. If an enterprise is able to act independent of market forces i.e., if other players in the market in question are unable to act in a manner that would correct the enterprise’s conduct, the enterprise has dominance.

Thanks for your input, LAGNA. There may have been a misunderstanding regarding what I mean here. The idea is that an enterprise can acquire a “dominating” position by engaging in anti-competitive conduct. However, an incumbent might not be able to utilise the same anti-competitive strategy as the CCI will not go into the allegations of “abuse of dominance” unless dominance can be proved and is prejudicial to the interest of consumers.

Dominance may (in a certain context) be the ability to act independent of market forces. However, the intent and point of the piece is to argue against “abuse” in order to become dominant. The post makes no comment on “dominance without abuse”, if it can be put that way.

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